Retirement strategies (finally) get interesting

Fund managers and super funds are finally starting to get their acts together to provide good retirement investment strategies. But it has proved a difficult task. Challenger stole a march on the industry in the retail space. Now others are coming to the party.

Wheelhouse Partners, a boutique associate manager of the multi-affiliate Bennelong Funds Management, is one of the new providers of retirement investment strategies. It has developed a low-cost derivatives-based strategy for both retail and institutional investors that covers the major concerns of retirees.

Alastair MacLeod, a co-founder and managing director of Wheelhouse Partners, says that his funds management business was set up, under the Bennelong umbrella this year, to cater specifically for retirees’ needs. In a portfolio sense, those needs are, mainly:

. to invest in growth assets because of retirees’ increasing longevity risk

. to offer ‘retiree-friendly’ characteristics, such as lower volatility, better capital protection and more and consistent income, and

. to do it at a low cost, “because fees stand between returns and outcomes”.

MacLeod has an interesting presentation he often gives to investors about the incidence of fat-tail events, which are those rare big movements in markets that, if they occur near or in retirement, can be devastating. They are not as rare as you think.

Using Bloomberg information, he shows that a fat-tail event, which means an event which is “three sigma and worse” in terms of its theoretical likelihood to occur and its deviation from the mean (think GFC) would be expected to happen 14 times over the 47 years between 1970 and 2017. Guess what: it actually happened 107 times.

The thing about tail risk, he says, is that it does not harm time-weighted returns. We all intuitively know this. It’s not about market timing, it’s about time in the market. That’s OK if you are young enough to get the market recovery. But if you are a retiree these periods are very harmful because you are living off your savings.

“Note that this may be simply due to a market correction, and thus not as memorable as a crisis, or it may be an event that occurs over multiple months, such as the GFC. Either way it’s the frequency of observations that matter if you are living off your savings.

“Tails are also harmful for retirees because they are not adding to their savings balances during the downturns. They are doing the opposite, living off their savings.”

MacLeod says the risks associated with big market moves are often correlated in the various asset classes in which the retiree is invested. For instance, the housing market may soften – which is a current example – and then credit spreads widen, job losses become more likely and, then. Equities become the most liquid asset class. You sell your shares when times are tough, he says. But, in an ideal world, that’s when you should be buying more shares. “People tend to do the wrong thing at the wrong time,” he says.

The Wheelhouse fund looks to achieve 60 per cent downside capture. “Our returns during these periods should be 40 per cent better than the average return, or the market, MacLeod says.

“To be specific, this doesn’t necessarily mean we will be 40 per cent better off than everyone else in a falling market, as this will depend on what the median return is for other investors, and not the average return. For example, 90 per cent of investors may receive plus-or minus five per cent of the market return. If we capture only 60 per cent of the decline in a crisis, then our returns should be far better than most other participants, very few of which rely on active tail-risk hedging strategies.”

Wheelhouse offers a fund structure for wholesale and retail investors, with a 79bps fee, which is at least 30bps below its nearest competitor in the wholesale/retail space and about 40 per cent below average. It also offers big super funds and overlay service that delivers the same outcome for their pension (retiree) members.

There is currently a wholesale (financial planners and platforms) fund and the firm is looking to launch a retail version next month, with ratings pending.